LDC graduation and Covid-19: A tussle between heart and brain

Bangladesh was set to fulfil the requirements for graduating from a least developed country (LDC) to a developing nation for a second decisive time in the 2021 review. The Covid-19 crisis, which may offset many of our hard-earned development milestones, can only diminish some of the polish off Bangladesh's standings; the country should still pass comfortably in the 2021 review.

The question is, whether we should defer it, at least until the 2024 review.

Recently, prominent economists have suggested that Bangladesh seek to defer the graduation. Nepal, after the devastating 2015 earthquake, successfully convinced the Committee for Development Policy (CDP) to defer graduation until 2021. The Maldives successfully deferred the graduation from 2008 to 2011 following the 2004 tsunami. Vanuatu's graduation was postponed until 2020 to allow it to recover from the devastation left by cyclone Pam. The CDP allowed time to all of these countries to recover and prepare for graduation.

For Bangladesh, the coronavirus pandemic is set to bring about more significant devastation. Post-Covid-19 macroeconomic indicators do not look so promising for the country. The World Bank has projected FY20 and FY21 GDP growth rates to be under 2 percent. Private investment, stagnated at around 21-22 percent of the GDP for over a decade, is now projected to come down to 12.7 percent this year.

The two key drivers of the economy – remittance and exports – which we rode on to emerge virtually unscathed from the global economic crisis of 2008, have been hit hard. A significant number of migrant workers have returned since the pandemic unfolded worldwide; many more are queuing up.

People on the lowest economic rung are facing the impact disproportionately, having to deal with new economic, social and digital divides. A rapid assessment by Brac revealed 62 percent of low-income wage earners have lost jobs and earning opportunities in the last couple of months. Many of the 55.25 percent people employed in vulnerable jobs – as defined by the International Labour Organisation (ILO) – have emerged as the "new poor."

Income and wealth inequalities were already tending to rise for more than a decade, and if the pandemic persists, it will worsen. While some of these adversities of the not-well-to-do population are common in most countries, others are due to pre-existing vulnerabilities rooted deeply in Bangladesh's economic, political and governance systems.

While some people may regain their livelihoods soon after the pandemic, others may not. People who had to sell their economic assets or borrow at high interest rates may need years to bounce back.

In the worst case scenario, the pandemic will take the country decades back in terms of development. Graduation and the resulting erosion of preferences will limit Bangladesh's ability to support these populations for an extended period; failure to do which will resemble a textbook scenario for the dreaded middle-income trap – the country may graduate, but people on the lower economic rung will not. Experiences in Brazil, Malaysia, Thailand and Indonesia support this hypothesis.

Yet here we have a situation where the emotional aspects can hardly be overlooked. Graduation in 2021 coincides with 50 years of independence for Bangladesh. Graduation is also one of the oft-repeated election pledges. There will be intense pressure from the political leadership to go for graduation, supported by popular demand. Hence, we should immediately start working on a sustainable transition plan to make graduation work. We need to focus both inward and outward for such a plan.

The immediate task is to prioritise internal reform – a long list nonetheless. Most critical ones that are needed to sustain our graduation include tax reform, VAT reform, banking sector reform, education reform, public health system reform, as well as reforms to address institutional weaknesses. We need to critically re-examine our policies and strategies to target the right person with the right support. And we need to be ambitious.

We also need to redouble our diplomatic efforts to convince the world to allow graduation-related provisions in the GSP schemes which are only present in the EU. Bangladesh has been able to utilise the advantages of being in the LDC category better than most countries. Its share of exports using LDC-specific preferences is 71 percent, compared, for example, to 26 percent for Myanmar – the only other country meeting all three graduation criteria.

Hence, we should actively advocate for extended multilateral support for all LDC-specific measures, including the Enhanced Integrated Framework. The ISMs (International Support Measures) need to continue for an extended period. We should also argue for extending the transition period to at least six years so that we can make necessary internal reforms.

Finally, in the 2018 triennial review, CDP recommended the creation of a category of countries facing extreme vulnerability to climate change and other environmental shocks. As one of the countries most at risk from climate extremities, Bangladesh may intelligently pursue the creation of such a category and inclusion in it.

The decision of deferring or not deferring the graduation will be a political one and for the majority of Bangladeshis, a matter of national pride! Hence, we feel that in this tussle between brain and heart, the heart is set to win. We should, therefore, intensify diplomacy and consolidate the political will needed to optimise a smooth and sustainable transition. We need to invest all our brains to achieve what our hearts desire!

Iffat Anjum, is a Policy Analyst at Brac and KAM Morshed, is a Senior Director of Brac